UPDATE 3-Consol to sell 5 W.Va. mines as coal regulations increase

Oct 28 (Reuters) - Consol Energy Inc said on Monday
it would sell five West Virginia coal mines to privately held
Murray Energy Corp as it focuses more on the growth of its
natural gas operations amid regulatory uncertainty for the coal
industry.

Consol is selling the mines, which comprise roughly half its
coal production, for $850 million cash, as well as $184 million
in future royalty payments for its coal reserves.

Murray will also assume $2.4 billion of Consol's
liabilities, mostly for worker pensions and other benefits.

Coal producers have come under increased regulatory pressure
in the past five years from the Obama administration, making the
industry unpopular on Wall Street.

"We are going to be an exploration and production company
with a coal subsidiary," Consol Chief Financial Officer David
Khani said on a conference call with investors, using the term
for companies that produce natural gas.

As a privately held company, Murray will be able to focus on
long-term returns for its mines rather than quarterly results
and payouts to Wall Street. Murray currently operates eight coal
mines.

The five mines being sold are some of Consol's oldest and
most expensive, but produce a steady stream of coal. Consol,
which was founded during the U.S. Civil War, said it would keep
cheaper coal mines in Pennsylvania and Virginia and use cash
from the sale to build out its natural gas operations.

The company has large holdings in the Marcellus and Utica
natural gas fields in Pennsylvania and Ohio, and drills for
natural gas underneath Pittsburgh International Airport.

It expects the deal with Murray to close by the end of the
year.

"These mines do not support our growth strategy," Consol
Chief Executive Officer J. Brett Harvey said on the conference
call.

The deal will cut Consol's annual administrative expenses by
$65 million, but will also lower income. Consol plans to reduce
its annual dividend in half to 25 cents once the deal closes.

That did not sit well on Wall Street, where shares of Consol
fell 1.4 percent to $37.60 in morning trading. (For a related
BREAKINGVIEWS column, please click )

Consol primarily sells thermal coal, which is used to
generate electricity, but also sells a small portion of
higher-margin metallurgical coal, which is used to make steel.

With the U.S. shale gas revolution cutting the price of
natural gas, U.S. power plants have been burning less coal,
sharply denting demand and thermal coal prices. Meanwhile, a
glut of steel in China and other fast-growing regions has eroded
demand for metallurgical coal.

The threat of U.S. regulation has also discouraged coal
generation.

The Obama administration last month announced regulations
setting strict limits on the amount of carbon pollution that can
be generated by any new U.S. power plant. The guidelines, which
the coal industry has vowed to fight, would make it nearly
impossible to build coal plants without using carbon
emission-capturing technology that foes say is unproven and
uneconomical.

NATURAL GAS POTENTIAL

Consol said the sale of the mines would give it time and
cash to expand its natural gas production.

For 2014, the company expects to produce 210 billion to 225
billion cubic feet of natural gas. On Monday, Consol said it
expected production to increase 30 percent each year.

"We have the assets if we want to take that number higher,"
said Khani, the CFO.

Stifel and Bank of America Corp advised
Consol.

Goldman Sachs and Deutsche Bank are
providing financing for Murray, which was one of 28 bidders for
the mine assets.